FM speaks, banks listen, loan rates fall

This is one pre-budget move that consumers are bound to cheer. Barely a week after Finance Minister P Chidambaram asked banks to boost loans to consumers for home and consumer durable purchases at an “affordable cost”, major public-sector banks, led by state-owned State Bank of India, have slashed lending rates across the board.

Four public sector banks, led by SBI, cut their prime lending rates (PLR) by 0.25-0.50 per cent. This will have a cascading impact on all categories of borrowers, from corporates to individuals, since the PLR sets the base for all loans. The reduction in rate is likely to make the net purchase cost (including interest charges) cheaper for everything from a house to cars and TVs.

“There is a feeling that adequate credit is not being provided to the housing sector and the consumer durables sector,” Chidambaram had told bank chiefs last week.

He asked banks to "pay attention" to provide adequate credit to these two sectors as they are "drivers of the economy".

Although banking regulator Reserve Bank of India had refrained from any further moves to cut rates on fears of fuelling inflation, banks themselves find themselves awash with funds.

Thanks to a volatile stock market, and the tailwind provided by the 2-2.5 per cent interest rate hike last year, which had also led to corresponding increases in interests banks paid on fixed deposits, there is no shortage of funds -- liquidity in bankerspeak -- in the system.

On a year-on-year basis, deposits grew by 29.5 per cent till January 25, as against the 23.5 per cent last year. At the same time, credit offtake grew at a tad over 22 per cent, compared to the near-30 per cent growth the previous year, according to data released by the Indian Banks Association.

For SBI, this is the second cut in less than 10 days. The bank had announced a quarter per cent cut on February 11, which kicked in on February 16.

"The benchmark PLR is revised downward by 0.25 percentage point from 12.50 per cent to 12.25 per cent with effect from February 27," SBI informed the BSE in its notification.

Moreover, Bank of India and Union Bank also announced cut their prime rates by 0.5 percentage points to 12.75 per cent on Wednesday. Bangalore-based Canara Bank also cut its rate by 0.25 percentage points to 12.75 per cent.

With home loan major HDFC having already reduced its prime rate by 0.25 percentage points effective February 1, and PNB Housing Finance slashing rates by 0.5 per cent, the flagging real estate and automobile sectors are set to witness a surge in demand.